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Module 6Sectors and Industries

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Module 6 - Learning Objectives

• Define industry and sector.• Differentiate between sectors.• Evaluate an industry on the basis of

size, valuation, relationship to the business cycle, regulations, industry dynamics, and relative performance.

• Categorize investments by industry and evaluate the impact of industry allocations.

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4

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Which sectors are the largest?Can you give reasons why?

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 Nov-05

Year

Per

cen

t o

f S

&P

500

Energy

Materials

Industrials

ConsumerDiscretionary

Consumer Staples

Health Care

Financials

InformationTechnology

TelecommunicationsServices

Utilities

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Here’s some history

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Here are some well-known companies. What industry and

sector are they in? • Citigroup• Lockheed Martin• Duke Energy• Starbucks• Cisco• Chevron• Nortel• Weyerhauser• Boise Cascade• Aetna• Allstate• Humana

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Sector Choices

U.S. Stocks by Sector

0

5

10

15

20

25

30

35C

ap

ita

l Go

od

s

Co

ns

um

er

Du

rab

les

Co

ns

um

er

No

n-

Du

rab

les

En

erg

y

Fin

an

ce

Ma

teri

als

& S

erv

ice

s

Te

ch

no

log

y

Tra

ns

po

rta

tio

n

Uti

litie

s

Pe

rce

nt

of

To

tal

% of 6700 Companies

% of $12.6 T Total MarketValue

Source: Wilshire early 2001

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Evaluate Industry Risk And Return

(2001 data)Industry Risk/Return

(May 1996 to May 2001)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Industry Index Risk (Standard Deviation)

Ind

ust

ry In

dex

Ave

rag

e M

on

thly

Ret

urn

Auto

Aerospace

Banks

Basic Materials

Technology

Consumer Durables

Healthcare

Energy

Financial Services

Food Processing

Construction

Metals

Real Estate

Retail

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Evaluating Sector Return and Risk

(2004 data)

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%

Sector Risk Return as of mid 2004

Biotech

Internet*

Semiconductor*

Software*

Real Estate*

Natural Resources*

Utilities

Materials

Energy

Financial

Industrial

Health

Consumer Discretionary*

Consumer Staples

* Less than 60 months of data

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Evaluating Industry Cycle

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Source: www.fidelity.com

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Not all industries are affected by recessions. Look over the following list of industries and identify those that might not be hit as badly by

recessions (also known as defensive industries). Give your reasons why.

• Food processing• Personal care• Tobacco• Hotels• Advertising

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Evaluating Industry Regulation

• Which industries are affected and how? – Food and Drug Administration (FDA)– Federal Communications Commission (FCC)– Federal Aviation Agency (FAA)– Medicare – Environmental Protection Service– U.S. Patent Office – Federal Trade Commission (FTC)

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Evaluating Industry Dynamics

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Evaluating FundamentalsPrice to Earnings Ratio by Sector

(First Quarter 2001)

0 5 10 15 20 25 30 35 40 45

Basic Materials

Capital Goods

Conglomerates

Consumer Cyclical

Consumer NonCyclical

Energy

Financial

Healthcare

Services

Technology

Transportation

Utilities

Stock Price Divided by Earnings Per ShareSource: www.multex.com, early 2001

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Sectors Relative Price Movement

-50.00% -40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

S&P 500

Energy

Materials

Industrials

Consumer Discretionary

Consumer Staples

Health Care

Financials

Information Technology

Telecommunications Services

Utilities

2001

2002

2003

Annual Return by Sector(S&P 500)

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Evaluating Relative Price

• Go to www.smartmoney.com and find the Map of the Market.

• Set controls to see price performance in the past six months.

• Compare to the chart in the previous slide.

• Which industries are cycling up?• Which are cycling down?